There is a lot of focus on dividend tax increases lately. I am a dividend growth investor, so it is an important subject to me. I decided to take a rough cut at what the impact will be on me and my wife if dividend taxes are raised. This exercise requires some assumptions, as the extent of any dividend increase is currently unknown, being subject to political negotiations. In my assumptions, I will make harsher projections than I actually think will happen, in order to be conservative. My first assumption is that our effective tax rate on dividends will double in 2013.
With dividend increases of 7% per year, we will more than make up for the increased tax rate in a little over a year. I look at the increased tax rate as an element of inflation, and inflation is the major reason that I am a dividend growth investor. Dividend increases generally outpace inflation. I expect that will happen here.